April 2, 2013 Munzer Hallum, special to RBTHAfter large-scale embezzlement schemes revealed at major government agencies and state-owned companies, Russian authorities step up their anti-corruption campaign. The bill forbidding officials from holding foreign-issued assets will a step in the crusade.

A Russian political youth activist form the Just Russia party attends a rally against governmental corruption in Moscow on July 22, 2008. The sign reads: "Bribery Stop!" Source: AFP / East NewsIn February 2013, President Vladimir Putin submitted a bill to the State Duma prohibiting government officials from holding foreign-issued securitiesor bank accounts abroad. The bill is expected to be one more step in the Russian government’s crusade against corruption, after large-scale embezzlement schemes were uncovered at major government agencies and state-owned companies.

The president’s bill comes as a result of a public and parliamentary discussion about corruption within the state apparatus. If signed into law, the bill would extend a ban on holding foreign bank accounts to all public servants, including Central Bank Board of Directors members, officials of constituent entities of the Russian Federation and functionaries of state-owned corporations.
Government officials will not even be able to open bank accounts abroad to pay for education or medical expenses. However, they will be allowed to own foreign real estate — provided they report it in Russia. Violators will be punished, potentially by being discharged from office.
Experts polled by RIA Novosti agreed that the bill would be an important milestone in the fight against corruption. They believe the document is preventive in nature, rather than prohibitive or repressive.
“This is an important part of the anti-corruption package of President Putin’s electoral program currently being implemented…. It’s very important for our elites to become more disciplined and responsible now, to purge themselves. The passing of this bill and enactment of the law will realize this,” associate professor of the MGIMO Political Theory Department, Yan Vaslavsky, said.
On Jan. 1, before February’s bill, the law “On Control over Correspondence between Spending by Persons Employed in Civil Service Positions and Other Persons and Their Income” came into effect in Russia, making it mandatory for government officials to report the income and spending of their family members. Misrepresentation or a discrepancy between income and spending will entail dismissal and transfer of the case to prosecutors for investigation.Lawmakers hope these measures will reduce the scale of abuse not only by federal but also by municipal officials, as well as by employees of state-owned corporations.
Chairman of the State Duma Ethics Committee,Vladimir Pekhtin, became the first victim of the presidential bill. He had to vacate his seat voluntarily, after it came to light that he had failed to declare a Miami condo worth several million dollars. At least two senators are planning to leave the Federation Council — the upper chamber of parliament — for similar reasons.
Russia’s authorities have long realized that rampant corruption is the number-one threat to the economy. The law “On Combatting Corruption” was passed in 2008, and Putin declared the fight against corruption to be one of his priority tasks after he returned as head of state in 2012.
The fight against corruption heated up in mid-autumn last year. A real anti-corruption wave arose literally within weeks. It kicked off with high-profile corruption scandals implicating various government agencies and state-owned companies. The Ministry of Defense came first.
As a result of an investigation, Minister Anatoly Serdyukov lost his job and was questioned as a witness in a case involving illegal sales of military-owned real estate, which resulted in 4 billion rubles (more than $130 million) in damage.
The next case involved embezzlement of funds appropriated by the Ministry for Regional Development for the construction of facilities for the APEC summit in Vladivostok.
Former Deputy Minister Roman Panov wound up in prison. Soon afterward, OAO Russian Space Systems — the company responsible for building theGLONASS satellite positioning system — found itself at the center of a scandal, after it was discovered that 6.5 billion rubles (more than $210 million) had been transferred to fly-by-night company accounts.
The Russian media has been active in covering the fight against corruption. During 2012, the Ministry of Agriculture, the Ministry for Regional Development and the Ministry of Communications, as well as the federal agencies Roscosmos, Rostelecom, Roshydromet, Rosimushchestvo andRosatom became the focus of media attention. Each case revealed the names of government ministers or high-ranking federal officials, as well as the amounts of stolen public funds.
Society at large is becoming increasingly aware of the results of the anti-corruption drive. According to the All-Russian Center for Public Opinion Research, 36 percent of those polled noticed them in 2007, whereas 45 percent did so at the end of 2012.

April 2, 2013 Alina Ukolova, RBTHWhile Russians are ready to pay for organic food higher prices, the new business niche is increasingly expanding. This indicates that new legislative regulations should put the situation under control.

Eco-friendly products are in high demand among Russians. Pictured: The Konovalov eco-farm in the Moscow Region. Source: RIA Novosti / Valery ShustovThe growing trend toward a healthy lifestyle is boosting organic farms in Russia that cultivate eco-friendly products. Russians in Moscow and St. Petersburg, particularly, are prepared to pay higher prices for organic produce. The new business niche has expanded so much that it now requires legislative regulation.
Organic foods are those produced without chemical fertilizers, additives or industrial processing. Naturally, organic crops have been cultivated in Russia for ages, but those vegetables and fruits mostly came from private plots until about five years ago.There were neither appreciable sales of green products nor distribution networks back then: Private farming had been discouraged since the first half of the 20th century, when large-scale collective farms were established. It was not until five or six years ago that some Russian businessmen decided to take up farming, invest in land, cultivate organic crops and produce organic meat for sale.
Four years ago, Boris Akimov, founder of the organic grocery store Lavka, was looking for private farmers to provide regular supplies. The situation has improved since then, as farming has gained popularity. Farms themselves now contact Lavka to offer supplies of their produce.

Akimov claims that 99 percent of contemporary Russian farmers out in the countryside used to live in cities. Take Vladimir Lunyashin of Penza Region, for example, who took a $300,000 loan from Rosselkhozbank to build a road house, create an apple orchard and plant a vegetable garden. He sells up to $20,000 worth of vegetables and fruit a month.
According to Igor Gubernsky, director of the Moscow gastronomic festival, there could have been many more success stories of this kind in Russia (there are 200 currently), but people are discouraged by the lack of standards and state support.
Farmers tend to complain about the high interest rates on subsidized loans (currently at 5-6 percent, compared to 2-3 percent in Europe), whereas initial investments in a farm can amount to $500,000. A breeding bull can cost up to $30,000 at auction, and treatment of land for cultivation costs about the same per 10,000 square feet, says Maksim Livsi, founder of Ferma at Home.
Yet there is a strong demand for farmer produce. Organic foods are currently available even on the Internet. Lavka or Pryamo s Fermy (Right from the Farm) shops, which have become market drivers, have created websites for customers to order foods directly from the producer and have them delivered to their door. There are shelves with farmer produce in all major grocery stores.
Opinion polls show that 60 percent of the residents of the two main cities – Moscow and St. Petersburg – are ready to pay more for eco-friendliness. To compare: Two pounds of potatoes grown using fertilizers and chemical treatment against potato beetles cost around $1.5, whereas organic potatoes cultivated with no chemical agents cost at least twice as much.

“A healthy lifestyle is a new hobby for Russians – especially in bigger cities, where incomes are higher than in the regions. It is no exaggeration to say that this new trend has boosted farming. You can find farmer produce in nearly all the chain stores in Moscow and St. Petersburg, which is a good sign,” said an expert who wished to remain anonymous.
The demand for organic food creates a demand for regulation. In late February, the Ministry of Agriculture prepared a bill on organic agricultural products and submitted it to concerned agencies. The document conceives of the certification of producers and state support for farmers starting in 2015. If farmers receive real support from the state, the business will expand many times over.

April 2, 2013 Olga SeninaThe ITAR-TASS news agency has reported (without naming its sources) that the size of the upfront payment to be received by Rosneft for its future exports to China could reach 8bn-10bn dollars.

According to Sechin, the actual contracts are to be signed in the very near future. Source: ReuterRussia is to increase its oil exports to China, and the Chinese buyer has agreed to pay upfront. That is the essence of the new agreement signed by Rosneft and China’s CNPC in Moscow at the end of March. The upfront payment by the Chinese could reach 8bn-10bn dollars.
Rosneft chief Igor Sechin, who previously served as head of the Russian president’s secretariat, knows very well that the success of any meeting depends on preparation.
He was therefore personally involved in preparing the deal between Rosneft and CNPC; the important announcement itself was timed to coincide with the visit to Moscow by the Chinese leader, Xi Jinping.
Sechin traveled to China in mid-February to discuss the terms of the agreement to increase Russian oil exports with all the interested parties.

Current contract
Under the terms of the current contract, which was signed in 2009, Rosneft is to export 300m tonnes of crude to China by 2030.
That same year Rosneft received 15bn dollars in loans from Chinese banks; Transneft was given a further 10bn dollars. Russian crude is being supplied to China via the Eastern Siberia – Pacific Ocean (ESPO) pipeline. The route originates at Tayshent (Irkutsk Region, Russia) and goes via Skovorodino station (Amursk Region, Russia). From there, a spur of the pipeline takes 15m tonnes of crude a year to Mohe county in China.
Another 15m tonnes a year is pumped to the Kozmino terminal (Maritime Territory, Russia), from where it is shipped by tankers to several countries, including China (which receives 5m tonnes a year by that route). At some point in the future the capacity of the Skovorodino-Mohe spur will be doubled to 30m tonnes a year.
Under the terms of the new deal between Rosneft and CNPC, the Russian company will supply an additional amount of oil over a 25–year period, with the Chinese customer paying upfront, Rosneft has said. Loan and upfront payment
The ITAR-TASS news agency has reported (without naming its sources) that the size of the upfront payment to be received by Rosneft for its future exports to China could reach 8bn-10bn dollars. Andrey Polishchuk, an analyst with Raiffeisenbank, believes that 10bn dollars is actually the lower end of the estimate.
In addition, China Development Bank is to extend an additional 2bn-dollar credit facility to Rosneft for the duration of the contract. “The terms of the loan are advantageous for us," Sechin has said.
Previously the Reuters news agency reported, citing informed sources, that Rosneft hoped to gain access to an additional 30bn dollars in return for doubling its exports - which would have been a repeat of the 2009 deal. That has not happened; instead, the new agreement contains the upfront payment clause.
Judging from previous experience, such a clause is important for Russia. In 2011 the two sides failed to agree on the formula for calculating the price; Rosneft believes that as a result, China paid less than it should have. In the end, the company gave the buyer a country discount of 1.5 dollars a barrel. When will the contract be signed?
According to Sechin, the actual contracts are to be signed in the very near future. Russian supplies to China via pipeline will eventually reach 31m tonnes of crude every year. The Rosneft chief says, however, that the figure will be reached gradually, “in line with the growth in infrastructure capacity”.
This year China will receive an additional 0.8m tonnes. But according to Russian Energy Minister Aleksandr Novak, next year exports could rise by as much as 7m tonnes using a swap mechanism. Russia will supply its crude to the Pavlodar refinery in Kazakhstan, while KazMunaiGaz, the Kazakh national oil company, will supply an equivalent amount of oil to China via the Atasu-Alashankou route.
The agreement signed between Rosneft and CNPC does not specify the exact transportation routes, and the Kazakh swap option has many opponents in Russia.
Russia and Kazakhstan are both members of the Customs Union and the Single Economic Space. If Rosneft were to supply its oil to the Pavlodar refinery rather than directly to China, the company would not have to pay export duty to the Russian treasury. Does re-export make economic sense?
On the other hand, the export duty is supposed to be refunded in the case of re-exports (and the swap mechanism is essentially a re-export operation). But Transneft does not seem to believe that it will actually get that refund. The company's representatives have calculated that if 7m tonnes of oil were to be routed via Kazakhstan, the Russian treasury would lose about 80bn roubles a year in unpaid export duty.
As a result, the company would end up making an extra profit at the expense of the Russian treasury. Andrey Polishchuk says that rather than paying 2.8bn dollars in export duty for the 7m tonnes of crude supplied to China, Rosneft would only pay an extra 100m-120m dollars in corporation tax.
The analyst says, however, that such a situation will only arise if Kazakhstan fails to refund the export duty.
Rosneft also has at least two other arguments. The first is that the long-awaited oil supplies should revitalize the project to build the Tianjin oil refinery, which will cost 3bn dollars and have an annual capacity of 10m tonnes. The joint venture to build the refinery was set up back in 2010. Rosneft has a 49-percent stake in the venture; the rest is owned by PetroChina.
The launch of the refinery was initially scheduled for 2012; its output was to be sold via a network of 300 petrol pumps in China. A month ago an intergovernmental commission discussed the launch of the refinery on the condition of an increase in oil supplies.
The second argument is the agreement about the participation of CNPC in oil exploration at eight licensed blocks in Eastern Siberia, as well as offshore areas in the Barents and Pechora seas. Rosneft owns seven offshore blocks there; preliminary exploration has already commenced at two of them: the Yuzhno-Russkiy and the Medyysko-Varandeyskiy.

Rosneft in search of investors
Rosneft needs investment capital to look for new oil fields. But according to Valeriy Nesterov, an analyst with Sberbank SIB, very few companies are prepared to finance expensive and risky geological exploration projects, especially in offshore areas.
There have already been several precedents of companies investing large amounts of money but then abandoning the projects because the oil reserves found at the new fields failed to live up to expectations. That is why potential partners need additional incentives – such as an increase in exports.
The terms of CNPC’s participation in Russian offshore exploration projects remain unclear. So far, however, the terms offered to all foreign partners have been more or less the same. The foreign companies are given a 33.3 percent stake in the joint ventures with Rosneft, and they finance all the exploration costs.
There are three such ventures at the moment. ExxonMobil is investing about 3.2bn dollars in three blocks in the Kara Sea and the Black Sea; Italy’s ENI about 1bn dollars in the Black Sea and the Barents Sea; and Statoil another 1bn dollars in the Barents Sea and the Sea of Okhotsk (Magadan-1). Russia has also invited India's ONGC Videsh Limited to partner in the exploration of the Magadan-2 and Magadan-3 fields, but the Indians have yet to respond. The size of the potential investment by CNPC remains unclear.

April 3, 2013 Elena Shipilova, RBTH AsiaWhile the car recycling fee that Moscow introduced on September 1, 2012 remain one of the major topics of the Russia-EU negotiations, Russia ignores European Commission’s request to revise its rates.
A car scrap-heap in Russia. Source: RIA Novosti / Ruslan KrivobokThe car recycling fee that Russia introduced on September 1, 2012 was one of the topics of the Russia-EU negotiations in Moscow on March 21–22, according to sources familiar with the talks.

During Russia-EU negotiations on March 21-22, sources say the European Commission did not object to the Russian government’s model for leveling the playing field for automobile importers and manufacturers. Sources also told Vedomosti that Russian officials announced at the talks that the size of the recycling fee would not be reduced. The European side did not object to this either, even though they had asked for a rate reduction.
It is expected that the Russian mechanism for auto-scrapping guarantees will be discontinued by mid-2013, and all manufacturers will be required to pay a recycling fee. The base rate is 20,000 rubles ($650) for passenger cars and 150,000 rubles ($5,000) for buses and trucks.
The fee is currently levied on auto importers and certain automobile manufacturing plants that were not able to assume recycling obligations (mainly small manufacturers of specially equipped vehicles). The European Commission has demanded a level playing field after Russia’s accession to the WTO, arguing that the differences in approaches discriminated against importers.
The European delegation did not object to the Russian government’s idea of introducing compensation for automobile manufacturers operating under the industrial assembly regime (which enjoy exemptions on imports of components), because the terms and conditions of earlier investment contracts would deteriorate after the transition to a universally collected recycling fee.
The European Commission was reminded that most agreements of this kind had been signed with European auto companies.

Had the government reduced the recycling fee, imports would have increased and international auto companies would have had fewer incentives to establish new production facilities in Russia, as well as develop existing facilities.

An increase in car prices will be one consequence of the decision. “The market will certainly respond with a price hike. This is unavoidable, even though each manufacturer’s situation is unique,” Yo-Avto CEO Andrei Biryukov said.

April 4, 2013 Dmitry Kazmin, Irina Mokrousova, Yekaterina Sobol, VedomostiThe government is drafting a law to force offshore companies owning strategic facilities in Russia to disclose their owners. Moscow’s Domodedovo Airport tops the list of likely first victims of the drive to “de-offshore” the economy.
Source: DPA / Vostock Photo.Companies incorporated in foreign jurisdictions that hold strategically important Russian facilities will be forced to either re-register in Russia, or reveal their ultimate beneficiaries, according to a source who attended a meeting presided over by Prime Minister Dmitry Medvedev on 6 March, and confirmed by another source in the Ministry of Economic Development.
“We need to amend current laws to prevent complex infrastructure facilities from being owned by entities we have no knowledge about,” the source explained. “It’s not about banning foreign ownership; we just want foreigners to control the facilities through Russian legal entities, and Russian legal entities not to conceal their owners.” A source at the Ministry of Economic Development confirmed that this marked the actual launch of efforts to “de-offshore” the economy, but neither of the sources gave any deadlines or named specific laws to be amended. “Companies will certainly be given time to settle technical issues,” the source said to assuage apprehensions.

Formally, the meeting was called to discuss the Domodedovo Airport ownership issue. “The airport was ordered to reveal who its owner was [following the terrorist attack at Domodedovo Airport in early 2011] – and this still has not been done. We don’t have the necessary laws.” Back then, Deputy Prosecutor General Aleksandr Buksman said they had failed to put the last piece of the puzzle in place to finally discover who the true owner of the airport was. At about the same time, Domodedovo’s parent company, DME Ltd, which was based in Maine, announced plans for an IPO and named Board of Directors Chairman Dmitry Kamenshchik as its sole owner. It later pulled the plug on its IPO plans, with Kamenshchik announcing he was a hired manager. “It is hard to imagine a New York airport owned by a group of individuals unknown to the New York mayor, let alone the FBI,” our source said.
“Domodevodo seeks to become the main airport for the 2018 FIFA World Cup,” a source in the government said. “Multi-billion dollar investments from the budget will be channelled into it. By revealing who the owners are, we are hoping to open up a dialogue with them.”
“Domodedovo representatives were not allowed to take part in the closed-door part of the meeting; therefore, we can provide no comment on its results,” a DME Ltd spokesperson said. “If I were to comment on the issue at hand, though, I would say that Domodedovo has always observed, and will continue to strictly abide by Russian laws.”
“There will be no specific Domodedovo law; instead, there will be a list of facilities which need to be registered in Russia,” a source in the government said.
Amendments are likely to be made to the law on foreign investment and the Federal Aviation Regulations, according to King & Spalding partner Ilya Rachkov. The law on foreign investments lists 42 types of activities key to national defence and security, while the Federal Aviation Regulations outline restrictions on foreign ownership of airports and airlines. Meanwhile, the move could result in constitutional conflicts, since the Constitution sets out the right of ownership and freedom of enterprise. On a different note, the country of incorporation can actually bring an offshore company to disclose its beneficiaries, Rachkov continued. Russia can send a relevant request, but it must have substantial grounds to do so, such as tax evasion charges, for instance.
Meanwhile, Paragon Advice Group partner Aleksander Zakharov says that the tax authorities in Cyprus can request information on beneficial owners from local directors and lawyers without any underlying inquiry. They can even prevent companies like Domodedovo from re-registering in other jurisdictions. The expert pointed out that, last year, Domodedovo owners transferred their assets from Maine (DME Ltd) to Cyprus (Verulia).
Another method may be employed to help disclose the Domodedovo oweners: the Ministry of Finance has proposed that the government require tax havens which are in receipt of Russian loans to disclose information on Russian founders and beneficiaries of corporations, trusts and funds. This information comes from a Finmarket report and has been confirmed by a source in the government in an interview with Vedomosti. Cyprus qualifies, as it has already received $2.5 billion in loans from Russia and is asking for $5.5 billion more.

April 3, 2013 Olga Gorshkova, RBTHThe Russian authorities are going to approve a development program for the country's Far East to improve the area’s economic infrastructure and the population’s standard of living.

"I suggest the sources [of funding] include revenue from the management of the National Welfare Fund," he said "Pension Fund assets could also be used as possible borrowed funds to carry out investment projects."
This meeting indicates that the authorities seek to find more funding to develp Russia's Far East. Russian ministers came together several times to address the problem of the Far East development.
For example, on March 21 Russian ministers met to examine a draft state program that includes two federal target programs: "Economic and Social Development of the Far East and the Baikal Region in the Period to 2018" and "Socio-Economic Development of the Kuril Islands (Sakhalin Oblast) in 2007-2015."
Despite opposition from Finance Minister Anton Siluanov, the ministers resolved, at the insistence of Prime Minister Medvedev, to approve the program "in general" — in other words, not completely. The sum in question totals 10 trillion rubles (roughly $321 billion), of which 3.8 trillion rubles ($122 billion) will come from the national budget.
"The figure is about 14 times higher than what we calculated to be possible within the parameters of the long-term budget," said Siluanov.Minister for Eastern Development Viktor Ishayev had already noted that, in order to achieve the main goal of "accelerating the development of the Far East," the regional government plans to seek additional sources of funding.
"If direct (i.e., budget) funds are not available, the money will be raised externally," Ishayev said.
In this regard, he had in mind, first and foremost, China.
"The Chinese are very keen to participate in the implementation of our state program and in the processes of privatization," said Ishayev. "The idea was mooted by the chairman of the Standing Committee of the National People's Congress, Wu Bangguo. It is now up to our leaders to decide."
In his opinion, Chinese investors are already beginning to exert an active influence on the economy of Russia's Far East.
"Chinese companies control 40 percent of our bio-resources and almost half our raw timber stocks, and [they] are engaged in gold mining," he said.
According to the governor of Amur Oblast, Oleg Kozhemyako, who also attended the government meeting on March 21, Chinese investment in the Far East is practically the only means to develop the economy.

"We are interested in attracting investments from China with a long-term planning period and the establishment of joint ventures, which would allow us to create more jobs, increase the tax base, and generate mutual profit. It’s important for China to open up a bit more to Russian products — not only timber and other raw materials, but also highly processed products. For example, we would like to deliver wholesale supplies of milk to China."
At the meeting on March 21, Dmitry Medvedev stressed that budget investments must be made in transport, energy, and social infrastructure. It is particularly important to secure funds to extend the Baikal-Amur Mainline and the Trans-Siberian Railway, observed Minister of Economic Development Andrei Belousov.
"The historical mission of our country and its Far Eastern neighbors, China and Japan, is to revive and reinvent for the 21st century the idea of the Silk Road as a bridge between Western Europe and East Asia," said journalist and Asian studies expert Vsevolod Ovchinnikov. "To divert trade between Western Europe and East Asia from the Suez Canal to the shorter route via Russia's Far East, the Trans-Siberian Railway needs to be modernized."
The document contains a total of 11 industry-specific subprograms to improve the economy of the region and develop the minerals and raw materials complex, timber and fishing industries, agriculture, transport, and energy infrastructure, as well as to create a decent standard of living for the local population, protect the environment, develop tourism, and provide scientific and HR support for the state program.
According to Kozhemyako, Chinese experience could be drawn upon in realizing the program.
"We are interested in China's development of its northeastern provinces," he said. "I think some elements could be included in the state program to develop Russia's Far East and Baikal regions, since it provides a sound working model, tried and tested in practice.” He also underscored that neither the government of Amur Oblast nor its inhabitants had any fears about the so-called Chinese threat.
The program is due to be finalized by April 2, when the State Commission for Far East Development will sit in Yakutsk. The Far East Development Fund (a 100-percent subsidiary of Vnesheconombank) will be used to support investment projects in the region.
"The development of the Far East is a priority for this government," said Dmitry Medvedev. However, according to the 2012 budget and 2013-2014 planning period, for the implementation of priority projects to develop the industrial, transport, and energy infrastructure of the Far East and the Baikal region, Vnesheconombank is to receive only 15 billion rubles ($482.9 million).This article is based on materials from Vedomosti, MK-Khabarovsk, ITAR-TASS.